Too Much Short-Termism: Has Executive Pay Contributed to the Problem?

Re-evaluating pay practices can help boards protect long-term company interests.

If you take large-company executive pay packages at face value, they typically offer a strong incentive for superior, long-term performance. Incentive grants for the long term make up about 80 percent of CEO pay packages for the 250 largest companies in the S&P 500. That percentage dwarfs the 20 percent represented by salaries and annual bonuses. With so much long-term pay at stake, why do long-term institutional investors object that companies are too short-term–oriented? The Vanguard Group, BlackRock, and State Street, for example, have raised concerns over the lack of a long-term value creation mind-set. If we take a close look at executive pay practices, we can gain a greater understanding of the evolution of long-term incentives, how they might contribute to short-termism, and how they might better fuel long-term gains.